Hello, and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. Following today's presentation, we will conduct a question-and-answer session. [Operator Instructions] I'd now like to turn the conference over to Mr. David Kinney, Director of Investor Relations. Sir, you may begin.

Thank you, operator. Hello, and welcome to LyondellBasell's Third Quarter 2020 Teleconference. I'm joined today by Bob Patel, our Chief Executive Officer; and Michael McMurray, our Chief Financial Officer. Before we begin the business discussion, I would like to point out that a slide presentation accompanies today's call and is available on our website at www.lyondellbasell.com. Today, we will be discussing our business results while making reference to some forward-looking statements and non-GAAP financial measures. We believe the forward-looking statements are based upon reasonable assumptions, and the alternative measures are useful to investors. Nonetheless, the forward-looking statements are subject to significant risks and uncertainty. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are available at www.lyondellbasell.com/investorrelations. Reconciliations of non-GAAP financial measures to GAAP financial measures, together with other disclosures, including the earnings release, are also currently available on our website. Finally, I would like to point out that a recording of this call will be available by telephone beginning at 1 p.m. Eastern Time today until November 30 by calling (888) 566-0568 in the United States and 203-369-3064 outside the United States. The passcode for both numbers is 6541. During today's call, we will focus on third quarter results, the current environment, our near-term outlook and provide an update on our growth initiatives. Before turning the call over to Bob, I would like to call your attention to the noncash lower of cost or market inventory adjustments, or LCM, that we have discussed on past calls. These adjustments are related to our use of last in, first out or LIFO accounting and the recent volatility in prices for our raw materials and finished goods inventories. During the third quarter, we recognized pretax LCM benefits totaling $160 million compared to LCM charges of $323 million during the first half of 2020. During the third quarter, we also recognized a noncash impairment of $582 million that reflects our expectation for reduced profitability from our Houston refinery. Comments made on this call will be in regard to our underlying business results, excluding the impacts of the refinery impairment and the LCM inventory adjustments. With that being said, I would now like to turn the call over to Bob.

Thank you, Dave, and good day to all of you participating around the world. We hope that you, your colleagues and your families are all staying healthy and safe during these challenging times. We appreciate you joining us today as we discuss our third quarter results. Let's begin with Slide 3 and review the highlights. In the third quarter, LyondellBasell's businesses benefited from improving volumes during the initial months of a recovering global economy. After excluding the noncash impacts of LCM inventory benefits and an impairment of our refinery, third quarter EBITDA was approximately $900 million, an improvement of more than $200 million relative to the second quarter. We continued to focus on cash generation and retention by efficiently converting more than 90% of our EBITDA into cash from operating activities and by carefully managing our working capital to end the quarter with approximately $5.5 billion of cash and available liquidity. Our strong balance sheet has served us well by allowing the company to capture opportunity during this downturn through the establishment and start-up of a new integrated polyolefin joint venture in China, followed by the announcement in October of our intent to form another integrated polyethylene joint venture in Louisiana before the end of this year. Both of these joint ventures offer unique opportunities for LyondellBasell to grow one of the core areas of our business by investing in new, already operating, high-quality assets that have significant upside as market conditions continue to improve. These transactions are prime examples of our strategy to identify, develop and capture opportunities through business cycles. Let's turn to Slide 4 and review our recent safety performance. Our employees and contractors maintain their focus on performing work safely to eliminate injuries, prevent virus spread and minimize emissions from our assets. During September, we had…

Thank you, Bob, and good morning, everyone. Please turn to Slide 7. While the recession and subsequent recovery has presented challenges for our business, we have also found great opportunities in the debt capital markets to reduce our interest costs and extend maturities by refinancing some of our debt as we raise capital to support the formation of the Louisiana joint venture. Immediately after announcing our agreement with Sasol, we renegotiated covenants, extended our revolving credit facility by 1 year and issued $3.9 billion in new bonds. These bonds were very well received by the market with an order book that was more than 5x oversubscribed. We locked in favorable rates with a weighted average coupon of 2.72% across 6 tranches with maturities ranging from 3 to 40 years. The new bonds serve to reduce the weighted average interest rate across our debt portfolio by 34 basis points. After redemptions planned for the coming days, we will have both accessible near-term maturities as well as staggered long-term maturities without any large maturity towers. With the completion of the Sasol joint venture, we will prioritize deleveraging over share repurchases and work toward improving debt ratios to levels consistent with a stronger investment-grade credit rating. We expect to continue to fund our dividend primarily from operating cash flows. One more modeling item, in the fourth quarter, we'll have a charge of approximately $80 million for loss on extinguishment of debt associated with our refinancing activities. As Bob mentioned, our cash conversion remained strong in the third quarter. On Slide 8, you can see that over the last 12 months, more than 100% of our EBITDA was converted into nearly $4 billion of cash from operating activities. Our business teams remain highly focused on aggressively managing inventories through these dynamic markets while prioritizing…

Thank you, Michael. Let's turn to Slide 10 and review our third quarter performance. As mentioned previously, my discussion of business results will be in regard to our underlying business results, excluding the impacts of the noncash LCM inventory changes and the impairment of the Houston refinery. Our global footprint and diverse business portfolio continued to provide resiliency in this challenging market environment. EBITDA for the third quarter was nearly $900 million, more than $200 million higher than the prior quarter. The upward trajectory supports our belief that pandemic-driven reductions in demand for our products bottomed during the second quarter. Our Olefins and Polyolefins segments continue to serve strong consumer demand for products used in packaging and health care markets, while demand increased for intermediates and polymers used in durable goods applications. Volumes rebounded for compounded polymers from our Advanced Polymer Solutions segment as automotive manufacturing reopened. Our Refining segment and the Oxyfuels & Related Products business continued to be challenged by decreased mobility that has reduced demand for transportation fuels. We expect that our diverse portfolio of businesses will see further improvement over the coming quarters as global economies continue on the path to recovery. Let's dig a little deeper on how the recovery is playing out in 2 significant markets for our company: polyethylene and transportation fuels. Let's turn to Slide 11 and review the growth in polyethylene demand during the pandemic. In a typical year, global polyethylene growth rate is approximately 4%. As you can see from the chart, in spite of the pandemic and recession, global polyethylene demand has still grown by 1% over the first 9 months of this year. As expected, Europe has seen a decline, but polyethylene demand in the U.S. and Canada and Northeast Asia regions has grown. Despite capacity additions, China…

[Operator Instructions] First question in the queue is from John McNulty with BMO Capital Markets.

So it looks like there's -- normally, you have a seasonal dip as you go from kind of 3Q levels to 4Q for a whole host of reasons. But it seems like given this year is a little bit of an atypical year, we'll call it, where you've got polyethylene prices surging throughout the third quarter and into the fourth and you've got maybe not quite as big of a delta around transportation fuels and that type of thing, I guess, how should we be thinking about your ability to maybe buck the trend of the normal seasonal dip going into 4Q? Is that something that's possible as the economies are recovering or is that maybe too much of a stretch?

John, indeed, especially in polyethylene, as you noted, this year -- and polypropylene, to an extent, this year, because of the hurricanes, and prior to that, the inventory reduction that we undertook as a company and generally as an industry, likely if there's some slowdown in demand, certainly, we, as a company, will take the opportunity to rebuild some inventory. We're at very, very low levels today and really kind of hand to mouth on many products. And I suspect that, that will get us through the seasonally soft period and get into next year. So I suspect that will be the case in polyolefins for the most part.

Next question is from Steve Byrne with Bank of America.

Just curious about this Bora JV. Is the $150 million EBITDA projection, is that effectively a net income number, kind of how would you compare that to your other assets in terms of the margin? And the reason I ask is, naphtha pricing has been pretty volatile over there, and I don't know whether that's fair to be looking at for that joint venture. Is it more likely that you're really getting the naphtha linked to oil prices from your refinery JV partner?

Yes. So Steve, the $150 million will be at the EBITDA level. So it's like equity earnings. Think of it that way. We do not expect dividends from Bora for a couple of years because the priority will be to delever. You will recall that the financing was roughly 1/3 equity, 2/3 debt for Bora. So the way we've outlined the joint venture and how the bank covenants work, we need to prioritize delevering first. We'll get some incremental commission income from the sales of polyolefins. The likely dividend income will come in year 3, 4 and onwards.

Next question is from Jeff Zekauskas with JPMorgan.

Brent prices have moved down from about, I don't know, $44 a barrel to $37 over the past month. Do you think that will make a difference to global petrochemical prices?

Yes, Jeff. So it may, but I think right now what's driving global petrochemical prices and especially polyolefin prices, it's more about the heightened level of demand that we've seen, very low levels of inventory. And I think that's really what's going to drive near-term pricing and provide support potentially for the final increase that's been announced here in the U.S. The other thing to note about a falling oil price is that it should benefit our European business. Because typically when oil price declines, we see margins open up in Europe. We saw the opposite of that in Q3 as oil prices actually increased, and we saw a bit of margin squeeze as we couldn't pass all of that through to the end users. So I think net, probably a benefit for Europe and near-term supply/demand likely drives pricing more so than Brent price.

Next question is from Aleksey Yefremov from KeyBanc.

Your O&P-Europe EBITDA has been sort of all over the place over the last 4 quarters with crude oil moving around, just like you just said, Bob. What's a good normalized number for the current environment for this segment? Is this closer to $130 million, $140 million that you just printed in the third quarter or maybe around $220 million EBITDA that you had in the first half of this year?

Yes. Aleksey, right now because there's so many moving parts, I hesitate to give you a normalized number. I think you've put your finger on a few of the drivers, which is the direction of oil price. Also, Europe has been one of the softer regions in the world. We've seen improvement in Europe from Q2 to Q3, but it has not been to the degree that we've seen in China and the U.S. So I would say more of a mixed market in Europe and more clear strength in the U.S. and in China. Well, let's wait until next quarter and we'll try to help you with that normalized number, but today I hesitate just given all the moving parts.

Next question is from Duffy Fischer with Barclays.

Question about 2 of your assets. So first one is just the refinery. With the write-down, what is the current book value of that asset? And are we in the ZIP code where we're actually thinking about maybe shuttering the asset? And then the second one is just PO/TBA, the increase in costs there and the delay. What's that going to do to the return on that project?

Duffy, on the refinery, book value will be a little over $500 million, and we'll post that in our Q later today or Monday. So that's after the write-down. On the PO/TBA project, certainly, returns will be lower, we think, probably in the 10% range on returns for PO/TBA. I think in the end, we're going to net out kind of the delay of the project in this way. I think, first of all, it gave us some cushion on cash flow this year that given the uncertainty at the time we made the decision back in Q2, I still continue to believe it was the right thing to do. Secondly, when we do start up, it will be timed better when markets are recovering or fully recovered, hopefully by then. And we'll be bringing new capacity online at a time where it's more likely to be needed. So in the end, I think balancing near-term needs with long-term market demand, I think this was the right call to make, and we continue to believe it was the right call.

Next question is from P.J. Juvekar with Citigroup.

Polyethylene goes in disposables like plastic bags and packaging. So the European PE demand, down 3% versus North America up 4%, that was quite a stark difference between the 2. And I thought Europeans stuck at home would be doing the similar things like ordering from home and packaging demand goes up with that. Is there something underlying in Europe that's going on besides just the weak economy?

So from our perspective, we really saw the industrial part of the demand be very weak. And you will recall that the automotive sector was essentially shut down. For example, we produce polyethylene that goes into fuel tanks. And so that's continued to be weak. The automotive sector has not come back in Europe as strongly as it has in the U.S., industrial bulk containers, things like that. So the industrial part of demand was softer in Europe. I think on the packaging side, we saw similar strength of what we've seen in the U.S. So it's more about the level of activity. It didn't resume to the rate that we had expected. And lastly, in Q3, we still saw some seasonal slowdown from a typical European holiday season. There's the European kind of vacation season where some of the factories shut down. There was still some of that and enough that it caused some seasonality in Q3.

Next question is from Bob Koort with Goldman Sachs.

Bob, I was wondering if you could comment a little bit on ethane. I was looking at the nat gas markets are up 80% or 90% from the summer and the ethane markets look like they're only up about $0.10. The strip on ethane looks fairly subdued. But I guess if the oil markets are terrible, maybe there's less drilling and there's some more -- the downtime curtailments start to dissipate. Do you see a potential run on ethane in the first quarter? And is there something you guys can do proactively to insulate yourself if that were to happen?

Bob, so first of all, we estimate that ethane rejection rates are still pretty high, probably north of 500,000 barrels per day. I've heard numbers much higher, almost double that. But likely, the rejection is probably happening in regions that are further away from the Gulf Coast. So there's probably some in the Permian, but probably more as you get out towards the Rockies and certainly in the Marcellus. So today, you see ethane in the low 20s. I wouldn't be surprised to see ethane move to the mid-20s, especially here in the winter as natural gas prices rise a little bit more. I don't think we'll see a spike only because higher prices will likely incent more supply to come online. And maybe, as you say, with more crackers starting up, we may, on the margin, need more supply from further away regions. And if that were to happen, then maybe ethane does move to the mid-20s. But I still think there's so much rejection out there that a little bit of price will incent more supply.

Next question is from David Begleiter with Deutsche Bank.

Bob, just on polyethylene for the October increase. One of the leading consultancies have declared that increase not successful. Do you agree with that assessment?

Well, so David, first of all, there are kind of timing effects on when these price increases get implemented, and it's phased over a 2-month period depending on contracts and size of buyer and that sort of thing. But if you kind of step back and look at the market environment today, as I mentioned earlier, inventories are still really low. And in fact, this morning, I was just looking at ACC data and days on hand is like 10% lower than where it was last year. And that's days on hand, so including a lower sales rate, the absolute inventory levels are incredibly low today. So I think that points to a tighter market. Secondly, we don't see demand really letting up yet. Our order books are filling up quickly for November. And as I said earlier, likely if there's some softness, certainly, our approach is going to be, we're going to have to build back a bit of inventory because of the impacts of weather and also just stronger demand. So let's see how it plays out, but it seems to me that, from our perspective, the increase is still on the table.

Next question is from Vincent Andrews with Morgan Stanley.

Just getting back to the polyethylene demand dynamics. If this year, let's just say, it finishes the year plus 1%, it's supposed to grow 4%. How do you think about next year? Do we have an above 4% year next year because some of the rebound maybe in the auto and industrial part as you suggested or do we just have had this air pocket this year and we don't make any of it up?

Yes. So Vincent, so U.S. PE demand so far year-to-date has grown about 1.7%. And if you look at Q3, the year-over-year is like 2.5%. So you can really see the higher level of demand growth post the low Q2. So I think Q2 was kind of a lost quarter. Just to kind of round out the regional look. In Europe, demand is up 2.5% year-to-date. And in China, it's up almost 5% year-to-date. And in China, imports are up about 5% year-to-date as well. So a really good growth rate globally in polyethylene. And to your point about, is there some catch-up growth next year, I do think in the industrial and auto areas. Now auto impacts polypropylene more than it does polyethylene. But I think when the recovery really takes hold, we should see above trend line growth for a year to 18 months. And I still expect that to be the case. We'll probably see that more dramatic in polypropylene just given that there's more durable good end-use in polypropylene.

Next question is from Hassan Ahmed with Alembic Global.

Bob, wanted to sort of continue with some of your thoughts around polyethylene. I was taking a quick look at Chinese polyethylene import data that just came out for September. Imports were up 36% year-on-year. Month-on-month, they were up 17%. And obviously, that's with the backdrop of continued sort of supply additions out there. So as you look at the near term, call it, 2021 and things start sort of normalizing, but obviously, more capacity keeps coming online, how should we be thinking about the pace of Chinese polyethylene imports?

Yes. So if you look over the next 2 to 3 years, it seems that if you use historical demand growth, the new capacity likely won't be enough to meet demand growth. And so they're going to need to incrementally import more polyethylene. And we don't think imports have leveled out yet in China. And we think that will be the case. I don't know about next year because of timing of projects, whether they're delayed or not. But if I look over the next 2-, 3-year horizon, likely their import needs grow. Another thing to think about, Hassan, is that if you look at Q2 to Q3, as U.S. demand came back in polyethylene, exports actually declined significantly from Q2 to Q3 out of the U.S. And if you look at U.S. next year, there's very little new capacity in polyethylene coming online. So speaking to the prior question about, will we see higher demand growth in the U.S. if there's catch up demand, I think if that's the case, there will be less being exported out of the U.S. and likely that will create a tighter global market. And lastly, if you look out further on polyethylene supply/demand, you're already seeing many projects that are being canceled or delayed. So it seems to me that we're seeing kind of a classic setup of a cycle here as we sit in the trough. You're starting to see delays, starting see cancellations. And let's assume China brings on all of the capacity that's announced, they still need to import more.

Next question is from Arun Viswanathan from RBC Capital Markets.

I guess, I just wanted to go back to polypropylene. Could you just remind us how much of your portfolio is levered there across O&P-Americas, Europe and APS? And what is your outlook there? I guess you mentioned a lot of durables exposure, obviously, could remain quite depressed, especially if we go into another round of lockdowns. But maybe you can just offer your thoughts on the polypropylene market and the impact on LyondellBasell.

Certainly. So Arun, at a high level, polyethylene certainly is a bigger driver than polypropylene if I look globally. In the U.S., polyethylene is a bigger business for us than polypropylene. In Europe, polypropylene is a bit bigger than polyethylene, not by a lot. And in APS, post the acquisition of A. Schulman, we're much more diversified. Prior to the acquisition of A. Schulman, right, 100% of our compounding was essentially polypropylene and about 90% was automotive. And you will recall back when we announced that transaction, that was part of the rationale was to have more diversity and participation in the end use segments, in packaging, in medical and have more polyethylene content. So I'd say on APS, we're probably still 60% polypropylene, 40% other, just as kind of a rough breakdown. On the polypropylene outlook, certainly, polypropylene has struggled this year, especially in Q2 because of the higher durable good and auto content. Polypropylene demand is down year-to-date by 1% to 2% in Europe and U.S., up significantly, though, in China. So China polypropylene demand is up some 15%. It's a very, very large increase. So our view is that polypropylene will be very constructive. We don't see kind of a wall of supply. And actually, I think that as the economies recover around the world, durable goods will likely grow faster into a growing economy and a recovering economy, which probably favors polypropylene even more than polyethylene.

Next question is from Kevin McCarthy with Vertical Research Partners.

A financial question for you. It looks like your net debt balance increased about $425 million on a sequential basis. I heard you call out the payments to Bora. So if I adjust for that, the net debt would have trended flat to down, let's say. My question is, are there other issues, I don't know, working capital, timing issues, other onetime events that would have prevented you from deleveraging more in the third quarter?

Yes, it's Michael. Yes, really Bora is the big one to call out. There's really nothing else of any significance to call out.

Kevin, if you look at this year, our operating cash flow will more than cover dividend and all the ongoing expenses. So we should have a surplus pre the Bora equity infusion.

Yes.

Next question is from Frank Mitsch with Fermium Research.

If I could just follow-up on that. Bob, you mentioned when you were talking about the Sasol JV that perhaps in the future you might acquire all of those assets. And obviously, you also discussed that the priority right now is to delever. How should we think about the potential timing of doing something with Sasol in the future? And then I guess, just kind of an overarching theme, should we think that Lyondell might do some more M&A in terms of making acquisitions in '21 or really will the delevering be front and center?

Yes. Frank, so first of all, I just want to be real clear on our capital allocation priorities. Maximize cash flow, continuity of the dividend and solid investment-grade rating through the cycle, we're committed. Whatever we decide to do, we're committed to the dividend and the investment-grade rating. Having said all that, timing of a Step 2, probably 3 to 5 years out. So I think we have a window to delever before that decision is upon us. Now of course, a lot of that depends on the pace of the recovery, how much excess free cash flow we generate in '21, '22 and '23. But remember that Sasol, the first half of the JV will be contributing excess cash flow beyond the additional interest expense that we'll take on. So we think that will be accretive or additive to cash flow for next year. Based on our current outlook, we think next year we can cover the dividend from operating cash flow. So I think our priorities are going to be to delever, first and foremost. And I think there's enough time before the Step 2 will be upon us. We'll be able to delever meaningfully.

Next question is from Mike Sison from Wells Fargo.

I apologize if I misheard this, but I thought you mentioned that OP Americas would improve in the fourth quarter versus the third quarter. Hopefully, The Browns continue that rout as well. But when you think about that margin green in Slide 14, was the bulk of that achieved in September? And is that sort of the run rate as we head into the fourth quarter?

Yes, Mike. So the -- indeed, the timing of price increases, except for that last 5, most of it was implemented kind of later in the quarter as the way it all lays out. So I think that's probably a reasonable way to look at it is the September would be the run rate going into Q4. I think the thing we'll have to watch for is the seasonality. As I mentioned earlier in response to some of the other questions, my sense is that the market is so tight and the inventories are so low that I don't think we'll see the degree of seasonal softness that we've seen in past years this year, but let's see. And to your comment about The Browns, let's hope they continue to strengthen as we go into Q4.

Next question is from Jonas Oxgaard with Bernstein.

Looking at the compounding business. So it sounds like your synergies are captured and automotive is coming back. Polymer prices are, for lack of a better word, normalizing. So can you give us a sense for how do you think about sustained or sustainable earnings in that business? And how are you thinking about a strategic outlook for it? Is this something you're looking at adding to?

Jonas, so first of all, on APS, I think you're really in Q3 starting to see what a fully synergized APS represents and the earnings power. As volume grows, more of those dollars will flow straight to the bottom line in a much more efficient platform post our synergies. If you go back to pre-COVID and around the time of the acquisition, the LyondellBasell business that was in APS, that is in APS today was earning at that time about $375 million of EBITDA. We acquired $200 million from A. Schulman, and we achieved $200 million of synergies. So nearly $800 million of EBITDA, that was kind of the run rate back in '18. So the question now is, what's the trajectory to get back to that kind of earnings rate? And I think, as you mentioned earlier, a lot of that will be tied to the recovery in automotive, looks very good in U.S. and in China. Europe needs to improve meaningfully for us to firmly be on the path to get to those kind of numbers that we had back in '18. But again, I think as volume increases, we should see a large part of that revenue fall to the bottom line on the margin because the fixed costs are now all covered and we have a synergized platform. So normalized earnings, if you go back to '18 conditions, should be closer to $800 million.

Next question is from John Roberts with UBS.

Do you need to write down the TBA assets as well like you wrote down the refinery? Or because it's integrated into the PO operations, the value doesn't need impairment?

Yes. So exactly, as you said, first of all, it's a co-product in our I&D business. But more importantly, John, the market characteristics for TBA are a bit different than what we see for our refinery because the margin in TBA is based on upgrading butane to MTBE. So whereas in the refinery, part of our margin is the light-heavy differential. And there, we think there's a longer road to recovery to get more sour crude back on the market. I would characterize the TBA downturn as cyclical and perhaps part of the refining downturn as being a little bit more lasting because of this lack of supply of sour crude. So we will not be writing down our PO/TBA or our TBA assets. Think of that as being more cyclical.

The last question in the queue is from Matthew Blair with Tudor, Pickering, Holt.

Are you still planning a refinery turnaround in 2021? And if so, can you share any details on the cost and the scope?

Yes. So Matthew, you've got us in the middle of thinking through that. So I'll be able to give you a definitive answer at the next earnings call. We're thinking through our cash needs for the company, how the markets will develop. We want to make a really thoughtful decision because we still think that our refinery is an asset that makes it through this downturn. So partly what I'm trying to balance here is near term versus long term and how do we position the refinery best for when markets do return. So we're going through all that math now. And certainly, we're going to do whatever we need to do to manage the regulatory requirements and all of the safety-related projects that we need to do. And those are a primary focus for us. And then beyond that, the turnaround timing is part of a broader set of decisions that we're trying to make next year for the refinery. So stay tuned.

I'm showing no further questions at this time.

All right. Well, thank you. Well, let me offer a few closing remarks. Our team at LyondellBasell, we're continuing to focus on near term maximizing free cash flow, continue the dividend and maintaining a solid investment-grade rating through the cycle, as I've consistently mentioned over the past few calls. At the same time, I think we're really well positioned to emerge stronger from the pandemic because we'll have a lot more assets, a synergized APS platform, we'll have lower CapEx as we come out of the pandemic as well. And I think all that sets us up to really accelerate on free cash flow generation with our initial focus being on delevering. But I think our company is really setting up for coming out of this downturn in a very good way, much stronger than when we entered. So thank you for your interest in our company, and we'll look forward to updating you at the end of January, have a great weekend and be safe.

This concludes today's call. Thank you for your participation. You may disconnect at this time.